Satiating the thirst
Water resources are vital in deciding the future of energy projects. And with limited H20 resources in the region, effective management is key.
Not only is water essential for the survival of life on our planet, it is also the lifeline of the energy sector. Essential for energy production, demand for water is growing at twice the rate of energy demand. And the Middle East’s oil producers, with very limited water resources, face energy production challenges more than the rest of the world. Water is integral to power generation, extraction, transport and the processing of oil, gas and coal. Now with biofuels, water is needed in irrigation of crops used to produce such fuels.
The Paris-based International Energy Agency estimates that water withdrawals for energy production in 2010 were 583 billion cubic meters (bcm). Of that, water consumption – the volume with- drawn but not returned to its source – was 66 bcm. The projected rise in water consumption of 85 per cent over the period to 2035 reflects a move towards more water-intensive power generation and expanding output of biofuels, says IEA. The Agency says water is growing in importance as a criterion for assessing the viability of energy projects, as population and economic growth intensify competition for water resources. In some regions, water constraints are already affecting the reliability of existing operations and they will increasingly impose additional costs.
In some cases, they could threaten the viability of projects. The vulnerability of the energy sector to water constraints is widely spread geographically, affecting, among others, shale gas development and power generation in parts of China and the U.S, the operation of India’s highly water- intensive fleet of power plants, Canadian oil sands production and the maintenance of oil-field pressures in Iraq. Water already accounts for 15 per cent of the world’s total water use.
In some regions, water constraints are already affecting the reliability of existing operations and they’ll introduce additional costs. Partner at PricewaterhouseCoopers Middle East, Paul Navratil, told TRENDS what oil is to the rest of the world, water is to the Middle East, so effectively man- aging water resources is vital in deciding the fate of the energy sector in the region. “The headline challenge for the oil producing nations of this region will be the continuation of the reliable and effective hydrocarbon source for the world,” he said, adding that sustainable usage of water will play a vital role in ascertaining the region’s role at the global energy stage. Managing the energy sector’s water vulnerabilities will require deployment of better technology and greater integration of energy and water policies, and this can be achieved with more investment in the energy production infrastructure. Navratil says, “The F&D (finding and development) cost in the region stands at $2.5 to $3 per barrel. The cost of producing oil will at least triple in the near future, ranging from $6 to $9 per barrel.”
From the operational point of view, the region will have to invest close to $1 trillion in improving and developing energy infrastructure, which includes the smooth supply of power and water, says Navratil. One of the most important things for the region is that before continuing to be the hydrocarbon supplier to the world, GCC countries must make sure they remain reliable suppliers within the region. With economies diversifying and reducing their dependence on petroleum, the investment in the sector may take a back- seat. However, PwC’s Middle East partner says diversification and investment in the oil sector go hand in hand. “Hydrocarbons contribute, approximately, 40 to 80 per cent to the GCC countries’ GDPs. Of course, we need diversification, but it should come from the oil and gas sector. Most of the government revenues come from the oil sector, and in Kuwait oil is responsible for 90 per cent of the state’s revenues. “We cannot shy away from the fact GCC countries are oil-based economies. In my view, the first stage of diversification should be the transformation of the hydrocarbon molecule.
Managing the value of transformation of the hydrocarbon molecule will result in significant additions to the regional economies,” he says. In simple terms, countries in the region should invest more in the petrochemical sector because the strength of petrochemicals will drive the manufacturing, logistics and packaging sector, Navratil says. Giving a country wise breakdown, Navratil says Kuwait is planning to launch refinery and clean fuel projects, but the country should focus more on petrochemicals be- cause it is the logical pattern of investment in the energy sector. “Saudi Arabia is investing tremendously in refining and petrochemicals. They are leading the way for the region, and when the current projects are materialized, Saudi Arabia will become one of the top nations in terms of petrochemical transformation. The next investment stage for Saudi Arabia would be put- ting capital in the value chain, which is industrialization and commercialization of the final form of hydrocarbon.
“Qatar is all about investments, and besides liquefied natural gas, Doha is investing in petrochemicals also. They have done quite well until now in partnership with multinational ventures, but the final execution of new projects re- mains a huge challenge for Qatar. “But the UAE is an exceptional story because the oil and gas sector is not managed centrally as in other GCC countries. There are a lot of participants who are developing their own energy strategies and making investments in a more de-centralized manner.
The advantage with the UAE is that de-centralized strategies result in diversification, and at the same time over-diversification is the downside as well, says Navratil, adding that Oman is all about downstream expansion and the nation is investing heavily in the sector. Taking a global point of view of the sector, several research reports and energy experts have pointed out a clear shift in demand from OECD countries to emerging markets in Asia and the changes at the global energy stage led by efforts in the United States to adopt wind and solar energies more aggressively. IEA in a report released in Dubai says the global energy map is changing, with potentially far-reaching consequences for energy markets and trade.
It is being redrawn by the resurgence in oil and gas production in the United States and could be further reshaped by a retreat from nu- clear power in some countries, continued rapid growth in the use of wind and solar technologies, and by the global spread of unconventional gas production. “Global energy demand will grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase,” it said, adding energy demand will barely rise in OECD countries, al- though there is a pronounced shift away from oil, coal (and, in some countries, nu- clear) towards natural gas and renewables.
Despite the growth in low-carbon sources of energy, fossil fuels remain dominant in the global energy mix, supported by subsidies that amounted to $523 billion in 2011, up almost 30 per cent on 2010 and six times more than subsidies to renewables. Looking forward to 2013, the strengthening of global economy will positively affect oil prices. Chief economist of BNY Mellon, Richard B. Hoey, told TRENDS that oil prices currently are at appropriate levels and in the near term it will see a price range of $110 and $90 per barrel, and there won’t be any major disruptions in terms of supply from the Middle East. “By late 2013 the world economy will be much stronger, not dramatically stronger, and the average oil prices around that time would be close to $120,” he said.